CHAPTER 13  INTERNATIONAL EQUITY MARKETS
SUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTER
QUESTIONS AND PROBLEMS
QUESTIONS
1.  Get a current copy of The Wall Street Journal and find the Dow Jones Country Indexes listing in Section C of the newspaper.  Examine the year-to-date percentage changes in U.S. dollars for the various national indexes.  How do the changes from your table compare with the year-to-date percentage changes from the sample provided in the textbook as Exhibit 13.8?  Are the same national indexes positive and negative in both listings?  Discuss your findings.   
Answer:  This question is designed to provide an intuitive understanding of the benefits from international diversification of equity portfolios.  It is very unlikely that the student will find many, if any, national market indexes that have year-to-date returns that are even close to th
e same level as in Exhibit 13.8.  Over different time periods, different market forces will affect each national market in unique ways and the exchange rates will be different.  Some markets that previously yielded a positive return will now show a negative return, and vice versa.  Similarly, some markets that had yielded a large positive (negative) return may now show only a small positive (negative) return.
2.  As an investor, what factors would you consider before investing in the emerging stock market of a developing country?
archaicAnswer:  An investor in emerging market stocks needs to be concerned with the depth of the market and the market’s liquidity.  Depth of the market refers to the opportunities to invest in the country.  One measure of the depth of the market is the concentration ratio of a country’s stock market.  The concentration ratio frequently is calculated to show the market value of the ten largest stock traded as a fraction of the total market capitalization of all equities traded.  The higher the concentration ratio, the less deep is the market.  That is, most value is concentrated in only a few companies.  While this does not necessarily imply
that the largest stocks in the emerging market are not good investments, it does, however, suggest that there are few opportunities for investment in that country and that proper diversification within the country may be difficult.  In terms of liquidity, an investor would be wise to examine the market turnover ratio of the country’s stock market.  High market turnover suggests that the market is liquid, or that there are opportunities for purchasing or selling the stock quickly at close to the current market price.  This is important because liquidity means you can get in or out of a stock position quickly without spending more than you intended on purchase or receiving less than you expected on sale.
3.  Compare and contrast the various types of secondary market trading structures. 
Answer:  There are two basic types of secondary market trading structures:  dealer and agency.  In a dealer market, the dealer serves as market maker for the security, holding an inventory of the security.  The dealer buys at his bid price and sells at his asked price from this inventory.  All public trades go through the dealer.  In an agency market, public trades go through the agent who matches it with another public trade.  Both dealer and agency m
arkets can be continuous trade markets, but non-continuous markets tend to be only agency markets.  Over-the-counter trading, specialist markets, and automated markets are types of continuous market trading systems.  Call markets and crowd trading are each types of non-continuous trading market systems.  Continuous trading systems are desirable for actively traded issues, whereas call markets and crowd trading offer advantages for smaller markets with many thinly traded issues because they mitigate the possibility of sparse order flow over short time periods.
4.  Discuss any benefits you can think of for a company to (a) cross-list its equity shares on more than one national exchange, and (b) to source new equity capital from foreign investors as well as domestic investors.
Answer:  A MNC that has a product market presence or manufacturing facilities in several countries may cross-list its shares on the exchanges of these same countries because there is typically investor demand for the shares of companies that are known within a country.  Additionally, a company may cross-list its shares on foreign exchanges to broaden
its investor base and therefore to increase the demand for its stock.  An increase in demand will generally increase the stock price and improve its market liquidity.  A broader investor base may also mitigate the possibility of a hostile takeover.  Additional, cross-listing a company’s shares establishes name recognition and thus facilitates sourcing new equity capital in these foreign capital markets.

5.  Why might it be easier for an investor desiring to diversify his portfolio internationally to buy depository receipts rather than the actual shares of the company?
Answer:  A depository receipt can be purchased on the investor’s domestic exchange.  It represents a package of the underlying foreign security that is priced in the investor’s local currency and in a trading range that is typical for the investor’s marketplace.  The investor can purchase a depository receipt directly from his domestic broker, rather than having to deal with an overseas broker and the necessity of obtaining foreign funds to make the foreign stock purchase.  Additionally, dividends are received in the local currency rather than in foreign funds that would need to be converted into the local currency.
6.  Why do you think the empirical studies about factors affecting equity returns basically showed that domestic factors were more important than international factors, and, secondly, that industrial membership of a firm was of little importance in forecasting the international correlation structure of a set of international stocks?

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